Art Hacks: The Value of an Art Donation by an Artist

 

The finest explanation of the value an artist can claim for tax purposes upon donating a piece of artwork is expressed in a blog post called "The Generosity of Artists" by Doug Woodham dated Feb. 11, 2019.

"THE GENEROSITY OF ARTISTS

These artists are generous in the extreme. None of them will receive meaningful tax benefits from their donations, due to two U.S. tax code provisions.

When a taxpayer donates an artwork to a charitable organization, she can receive a charitable deduction equal to the fair market value of the object only if the organization receiving it passes what is called the "related use" test. Put simply, the organization must use the donated artwork in pursuit of its mission. Art that is accepted into the permanent collection of a museum passes this test, as does art donated to a school that will be displayed and used in art history classes. But if the intent of the charity is to sell the work, then the donation fails the “related use” test. In these circumstances, the taxpayer will only be able to receive a charitable deduction equal to what the IRS calls their “basis” in the object, which is typically much lower than its fair market value. Because all the artworks donated to the Miss Porter’s auction do not meet the “related use” test, it’s essential to understand how the IRS defines “basis.”  

The IRS defines “basis” very differently for artists and collectors. Artists can only deduct what it cost them to make the artwork. For example, if an artist donated a drawing with a $100,000 fair market value to a benefit auction, they would likely receive a tax deduction of around $100 for it -- the cost of the pencils and paper that went into making it. This is true even if the work sells for $100,000 or more in the auction. So all the artists donating their works to the Miss Porter’s auction are receiving essentially no tax benefits for their generosity. Collectors are marginally better off than the artists, because the IRS deems their basis to be what they originally spent to buy the artwork. For the kinds of works that show up at auction, that is still likely to be far less than its current fair market value."